Developed non-U.S. stock markets generated strong returns in the third quarter of 2013, while emerging markets posted less robust gains. Developed European markets outperformed most markets in Asia and the Americas largely due to signs of improving economic growth and investor sentiment. Despite several bouts of heightened volatility, Asia's largest markets (China and Japan) posted solid third-quarter results. However, most emerging markets continued to struggle amid concerns about slowing growth and currency weakness. Small-cap companies significantly outperformed their large-cap counterparts.
The International Discovery Fund returned 10.42% in the quarter compared with 12.36% for the S&P Global ex-U.S. Small Cap Index. For the 12 months ended September 30, 2013, the fund returned 22.77% versus 21.44% for the S&P Global ex-U.S. Small Cap Index. The fund's average annual total returns were 22.77%, 12.12%, and 12.44% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2013. The fund's expense ratio was 1.23% as of its fiscal year ended October 31, 2012.
For up-to-date standardized total returns, including the most recent month-end performance, please click on the Performance tab, above.
Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results.
Share price, principal value, and return will vary and you may have a gain or loss when you sell your shares.
The International Discovery Fund charges a 2%
redemption fee on shares held 90 days or less.
The performance information shown does not reflect the deduction of the redemption fee;
if it did, the performance would be lower.
In terms of regional allocation, we remain overweight Europe amid signs of a gradual economic rebound in the region. The portfolio is still slightly overweight Japan as we are confident that the country's "Abenomics"-led economic recovery will boost Japanese corporate earnings. In emerging markets, we shifted to an overall underweight during the quarter, with a neutral position in developing Asian markets and underweights to Latin America, Africa, and Eastern Europe. We adjusted the portfolio's emerging markets positioning as a result of concerns about worsening fiscal and current account deficits in countries such as India and Indonesia. The portfolio's largest sector overweight relative to its benchmark is still information technology, and we also maintained a significant overweight to consumer discretionary. The largest underweight sector position was financials. Much of our trading during the quarter was stock specific and not directed at adjusting relative sector weightings.
We remain optimistic about the intermediate- and long-term prospects for non-U.S. equities, but short-term gains may be somewhat muted. While we believe that many economies are stable or improving, the results may take some time and could be uneven. Although non-U.S. stock valuations are no longer as cheap as they were about a year ago, they are still below their long-term averages. Markets will likely need signs of robust earnings growth to move sustainably higher, so we are striving to remain selective and to focus on valuation discipline. In many emerging markets, we are still confident that a growing middle class, rising consumption, and increasing upward mobility will lift stock prices over the long term.